切遲杜威 (CHD) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Church & Dwight third-quarter 2006 earnings conference call. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

Before we begin I have been asked to remind you that in this presentation the Company's management may make forward-looking statements regarding, among other things, the Company's financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the Company's SEC filings. I would now like to introduce your host for today's call, Mr. Jim Craigie, President and Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Good morning, everyone. It's always a pleasure to talk to you particularly when we have good results to report. I'm going to give you a brief overview of the third-quarter and year-to-date results. I'll then turn the call over to Matt Farrell, our new Chief Financial Officer. Matt will provide you with specific details of the Company's third-quarter and year-to-date financial results. When Matt is finished I'll provide some further information on the factors driving our key business units. I'll then turn the call over to Zvi Eiref, our former Chief Financial Officer, who will provide you with an update on the integration of our two resent acquisitions, SpinBrush and Orange Glo. Finally, I'll provide earnings guidance before we open the call to field questions from you.

Overall Church & Dwight delivered solid third-quarter and year-to-date results despite significantly higher costs driven by higher oil and other commodity prices. As stated in our last quarterly earnings call, gross margin improvement is our top corporate priority in 2006. As you know, oil costs increased dramatically in 2005 and led to around 300 basis points in higher costs for our company in 2005. This showed up in our business results when our corporate gross margin declined to 36.6% in Q4 of 2005 excluding onetime charges due largely to the higher commodity driven costs.

We reacted to this unprecedented increase in costs with a crisis mentality starting in late 2005. This crisis was attacked from multiple angles including price increases, elimination of unprofitable trade promotions and cost reduction initiatives across the entire supply chain. I'm very proud to say that the result of the Company's focus on offsetting the higher commodity driven cost has been outstanding. We have not only offset over 250 basis points in higher costs in the first three quarters of 2006 versus year ago, but we achieved a 110 basis point increase in gross margin year-to-date including a 130 basis point increase in Q3 versus year ago.

These strong gross margin results will benefit the Company in two key ways. First, they will enable us to significantly increase our marketing spending in future quarters to deliver solid organic growth. Second, the strong gross margin results will also enable us to increase our earnings forecast for 2006. I'll provide more detail on both of these positive benefits later in the call. I'll now turn the call over to Matt who will provide you with more specific details on the Q3 and year-to-date results.

Thank you, Jim, and good morning, everybody. I'll start with the headlines. Third-quarter EPS was $0.57 per share compared with $0.51 in 2005. This is a 12% increase on a reported basis. The nine-month earnings per share increased $0.13 to $1.71 which is an 8% increase also on a reported basis.

Now there are a few items which are pointed out in the release which are worth bearing in mind as we compare the results. This year's third quarter has $0.03 of stock option expense offset by a net tax benefit of $0.03 driven by the recent completion of a tax audit. Last year's third-quarter results, you may recall, included a tax benefit of $0.09 related to the reduction of tax liabilities and also last year that was offset by an $0.08 charge related to the verdict in a patent infringement case.

If we were to take these items into account -- the tax benefits, the litigation charge and the year-to-date impact of stock option expense, which is $0.07 -- the nine-month earnings per share increase over last year would have been approximately 11%.

There are a few other factors affecting the quarter; the most important would be the price increases which were announced in February but took effect in April for three of our major household productlines -- liquid laundry, baking soda and cat litter. These increases helped restore our margin structure, but it also reduced our unit volume and slowed down our overall growth rate.

Another key factor in the quarter was the completion of the acquisition of the Orange Glo business which we acquired on August 7th. The Orange Glo results since that date are in our numbers and we were at approximately a breakeven for Orange Glo for the quarter.

Now let's walk through the P&L statement beginning with sales. Third-quarter reported sales of $519 million were 17% higher than the prior year and up approximately 2.5% on an organic basis. This excludes acquisitions and the impact of currently. Year-to-date sales were $1.42 billion; this is a 9% increase on a reported basis and approximately a 1.5% increase on an organic basis.

From a productline perspective, ARM & HAMMER liquid laundry detergent, First Response pregnancy kits and Super Scoop cat litter all reported year-over-year sales growth both in Q3 and year-to-date. Toothpaste and antiperspirants on the other hand were weaker compared to last year, both for the quarter and also for year-to-date.

We should take a moment to review the factors influencing the trend in our organic sales growth. You may recall our organic growth in Q1 was approximately 4% followed by a decline in Q2 of about 0.6%, that was again a result of the price increases. And then that was followed by a 2.5% increase in organic growth in Q3. The Q3 organic results are influenced by both the domestic consumer business which grew a little less than 1% organically in the quarter and the international business which accounted for most of the rest of the remainder of the organic growth.

I'd like to spend some time on the factors that influence the domestic consumer business, this is our largest business. First, there is the price increase for laundry, deodorizing products and pet care products (indiscernible) contrasts what happened in Q3 versus Q2. The full impact of the price increase was experienced in Q2 whereas expected the price increase affected unit consumption and particularly for our liquid laundry detergent. Our baking soda consumption was effected to a lesser extent and our cat litter business felt almost no impact. In the third quarter all channel consumption in dollars of liquid laundry was up slightly versus year ago and was also up for both cat litter and baking soda.

The second thing I'd like to address is the effect of our promotional activities in Q3 versus Q2. In Q2 we reduced our promotional activity in the interest of giving the new list price a chance to take hold. Then in Q3 we significantly increased our promotional efforts which help stimulate consumption. This had an effect on our net sales [wherefore] promotional expenses netted.

The positive aspect of the price increase is its contribution to higher year-over-year margins. If we look at margins, third-quarter gross margin increased to 39.1%. That's up 130 basis points versus last year and 250 basis points over Q4 2005 gross margins after adjusting for some unusual items in that quarter which we referenced in our second-quarter press release. Q4 2005 was a low point for our recent gross margin performance. The year-over-year gross margin expansion in Q2 on the other hand was 210 basis points compared to 130 basis points in Q3 and this is due to product mix and also the heavier promotional efforts in Q3 versus Q2 that I just mentioned.

With respect to Q4, we don't expect gross margins to be as strong as Q3. This is essentially due to product mix. With respect to mix, Q4 historically has lower sales of condoms, antiperspirants and depilatories in Q3 and these personal care products carry higher gross margin. Year-to-date gross margin is 39.2%, up 110 basis points. At the current gross margin levels we are performing near gross margin levels of two years ago before the commodity cycle began. And this was accomplished through a combination of three things -- pricing, promotional efficiency and cost reduction programs.

Moving down the P&L now to marketing. Marketing expense was up over $10 million both for the quarter and year-to-date largely driven by the acquisitions. Marketing expense as a percentage of sales was a little over 12% in the quarter in contrast to 10.6% as a percentage of sales year-to-date. With respect to the fourth quarter, we do expect marketing expense to be in the 12% to 13% range as a percentage of sales.

SG&A -- SG&A increased about $10 million on a reported basis, but remember that the prior year included an $8.3 million litigation charge. Excluding that from the prior year, we had an $18 million increase in SG&A which includes the operating and amortization costs for the acquisitions; it also includes stock option expense, higher R&D and higher professional fees in the quarter. SG&A expense for the nine months adjusted for the prior year litigation charge is up approximately $32 million, again driven by the acquired businesses, stock option expense and the other factors that I just mentioned.

Operating profit of $68.9 million is up $15 million year-over-year, it was a 28% increase for the quarter and year-to-date operating profit is now $207.9 million which is a 15% increase over the prior year. The operating margin for the quarter is 13.3% compared to 12.2% in the prior quarter.

Now let's move to other income and expense. You'll notice that other income and expense increased $3.7 million in the quarter and this is primarily due to the higher debt levels as a result of the acquisitions over the past year.

Moving to income taxes, as you can see in the release, our effective rate for the quarter is 31.7% compared to 21.6% in 2005, so a huge increase year-over-year. Year-to-date the rate is 36.5% compared to 30.8% for the first nine months last year. The these increases are primarily due to the reduction of tax liabilities in the prior year that I mentioned earlier.

Our year-to-date effective rate is 36.5%, this is approximately the tax rate that we will be using for the fourth quarter. As you know, Congress has not yet reinstated the R&D tax credit which is about $0.03 to the Company, so we'll be watching that closely. With respect to cash flow items, CapEx in the quarter was about $12 million and dividends were $4.5 million.

Turning now to the balance sheet, accounts receivable are up approximately $47 million versus a year ago due to the acquisitions and also higher international sales in the quarter. The U.S. receivables are about even with a year ago excluding Orange Glo.

Now inventories -- inventories are also up of about $47 million versus a year ago; about $40 million of the increase is related to Spin Brush and Orange Glo. Spin Brush does tend to have a relatively high inventory level due to its long supply chain from China. Other than that there's nothing particularly notable about our inventory situation. Net debt now stands at $887 million compared to about $601 million a year ago. We spent about $440 million over this 12-month period on acquisitions and that includes working capital. So that implies that our cash flow in the period was about $150 million.

In conclusion -- earnings were $0.57 in the quarter, up 12% on a reported basis; nine-month EPS was $1.71, up 8% on a reported basis; and if you take into account the items such as tax benefits, option expense and a litigation charge the increase over the prior year would be about 11%. Now back to Jim.

Thank you, Matt. I'd now like to provide you with specific details on some of our key categories to give you a better sense of what is driving the Company's results. Please note that when I mention consumption I'm talking about all channel consumption which includes traditional food and drug channels as measured by IRI; our actual retail consumption results in Wal-Mart; and our actual sales results in other sales channels not measured by IRI such as dollar stores and clubs.

These nonmeasured channels are growing faster than the measured channels and they represent almost 40% of the Company's total consumption and an even higher percentage on some of our brands. Thus, what you see as IRI or Neilson share and consumption results is often a misleading indicator of the actual total consumption occurring for some of our categories and brands.

Okay, let's first talk about our laundry category, our largest revenue contributor representing about 25% of our company's total sales. This category consists of liquid and powdered laundry detergents and fabric softeners. In 2006 our laundry business has been a tale of two cities, both with positive endings. In the first quarter our laundry net sales grew over 10% driven by heavier than normal merchandising activity on our liquid laundry detergent business particularly the ARM & HAMMER brand.

These results exceeded a strong 2005 growth of over 6% for our liquid laundry business. However, our first-quarter gross margins were well below year ago, driven by the higher oil and other commodity costs. To offset the higher costs we've been working hard on a broad range of cost reduction initiatives. At the end of Q1 we also announced significant price increases of 4% to over 10% to help offset the impact of higher oil prices which impact the product, packaging and shipping costs of our laundry products more than any other product in our company.

As stated earlier by Matt, in order to make these price increases stick we deliberately reduced some merchandising activity in Q2 by retailers who deeply discount frequently used products like laundry detergents. As a result our gross margins on laundry have increased over 400 basis points versus year ago; however, our liquid laundry business sales were essentially flat in Q2 versus year ago.

In Q3 our liquid laundry business exhibited improved sales as retailers were more willing merchandise the higher price points and consumers accepted the higher price points. The restoration of sales growth in our liquid laundry business in Q3 was also supported by the launch of several new products, increased distribution, improved packaging and new advertising.

On the new product front there are three new initiatives in our liquid laundry business that are driving improved organic growth. First, earlier this year we relaunched a perfume and die free version of ARM & HAMMER liquid laundry detergent that has a strong appeal among consumers with sensitive skin.

Second, we recently began shipping a new concentrated formula of ARM & HAMMER called Essentials, which is formulated with plant-based soaps and contains no dies, phosphates or bleaches. This product is targeted at consumers who prefer environmentally friendly products. And third, we recently launched a new line extension of our Xtra brand called Lasting Sensations which provides impactful experiential fragrances and is twice the concentration of current Xtra.

Now on the advertising front, for the first time in years ARM & HAMMER laundry detergent is being advertised on television as part of a new trademark advertising campaign that started in the second quarter. This new campaign has been in development for over a year. It unifies all the various product lines of the ARM & HAMMER brand under one powerful message.

Our consumer research shows that almost 60% of U.S. households buy an ARM & HAMMER product, but the majority of these households only buy one type of an ARM & HAMMER product. While these households are made aware of ARM & HAMMER products in other categories, they've expressed a very strong purchase interest in other forms of ARM & HAMMER.

The continued profitable growth of our laundry business will also benefit from an industry wide cost saving initiative to reduce the water content of the product by moving to more concentrated offerings. This initiative will help to recover the unfavorable cost impact of higher oil prices by reducing the cost of the detergent, the package and its shipping cost. To support this initiative we began shipping concentrated line extensions in August and September to leading retailers. Rollout plans to all retailers are still being finalized.

I'd also like to briefly talk about business results in three other parts of our laundry and cleaners business. First, while liquid laundry detergent represents the majority of our laundry detergent business, we are the number two competitor in the powdered laundry detergent category driven by the ARM & HAMMER brand. Like the liquid laundry business, our laundry team has done an outstanding job of reformulating, resizing and promoting the ARM & HAMMER powdered detergent business to deliver improved year-to-date sales and profits versus year ago despite continued declines in this overall category.

Similar efforts are now being applied to our fabric softener business which has experienced year-to-date sales and consumption declines due to increased competition in the value tier of this segment where we play. The fruits of these efforts are expected to deliver better results in 2007.

I also want to mention that our cleaners business, consisting of brands like Scrub Free, Clean Shower and Brillo, has achieved sales and profit growth in Q3 and year-to-date for the first time in several years. Like the powdered detergent business, this resurgence has been driven by increased focus on business fundamentals including product news improved packaging and more impactful in-store marketing programs.

Finally, our laundry and cleaners business will also benefit from the recent acquisition of the Orange Glo company. This acquisition adds to our portfolio two cleaner brands, Orange Glo and Kaboom, and OxiClean, a leading laundry additive brand which has generated strong sales growth in the first nine months of 2006. Zvi will talk more about this recent acquisition in a few minutes.

So in summary, we have taken and will continue to take a broad range of actions to recover the cost increases that have impacted our laundry business and restore the organic growth of this key category which has been one of the key drivers of the total company's historic organic revenue growth.

Now the next category I'll talk about is our deodorization business. This category consists of the ARM & HAMMER baking soda carpet deodorizers and clumping cat letter. Overall this category had a net sales increase in the mid single digits in the third quarter, driven by high single digit consumption and sales growth on our baking soda and cat litter businesses, partially offset by declines in our carpet deodorizer business. We expect continued strong sales in this category driven by some exciting new products.

In the cat litter category we introduced a new corn based scoopable litter which is targeted at a well-defined group of consumers who prefer to use products made from natural ingredients. In our baking soda business we launched a new product called Fridge Fresh. This is a new refrigerator deodorizer that looks like a smoke detector and has a suction cop to attach to the side of the refrigerator. It also has an indicator to tell consumers when the product needs to be replaced. This is literally out of the box thinking as this product represents a significant upgrade versus our famous orange box of ARM & HAMMER baking soda which over 80% of U.S. households currently use to keep foods tasting fresher.

Both of these new products first shipped in May and product specific advertising began in August. In addition, Fridge Fresh is being highlighted in our new ARM & HAMMER trademark unification advertising which began airing in late Q2. Q3's sales of these new products were very strong and led to high single digit sales and consumption growth in our baking soda business.

Now the next category I'll talk about is family planning. This category consists of our condom and home diagnostic businesses. This category achieved high single digit sales and consumption growth in the third quarter driven by new products and superior marketing programs. On condoms we have driven steady consumption growth over the past two years by launching innovative new products and highly engaging new advertising campaigns. For example, in 2006 we launched a new ultra-thin condom which is our thinnest latex condom available in the market.

Our initiatives have resulted in both higher consumption growth rates for the condom category and higher shares for our Trojan brand. In fact, in the third quarter of 2006 the Trojan business had a record share of 73.9% which is 2.7 percentage points above year ago.

Our home diagnostic business also continues to achieve strong sales and consumption growth. We have driven significant growth in this business behind superior technology, new products and increased marketing support of our pregnancy and ovulation kit businesses. For example, in 2006 we launched a new pregnancy test kit product called Rapid Results which will tell a woman if she's pregnant within 1 minute of taking the test.

The steady pipeline of superior products and increased marketing support behind this business has driven double-digit all consumption growth since 2004. In fact, Church & Dwight's pregnancy kit business is now challenging Pfizer's EPT brand for total dollar branded share leadership of this category.

Next I'd like to talk about our skincare business which consists of depilatories and underarm deodorants. As a result of strong competition, this business continued to experience softness in the third quarter versus year ago. As growth in depilatories was more than offset by declines in the antiperspirant business. In Q3 our Nair brand achieved solid sales and consumption growth driven by new products, higher pricing and improved marketing.

On our underarm deodorants business, consisting of the Arrid and ARM & HAMMER brands, we are facing intense competition from much larger brands. To combat this competition we are upgrading our product fragrances, improving the targeting of our marketing campaigns and improving the gross margins of these businesses through cost saving initiatives that wall not degrade product efficacy.

As a result of these actions our Q3 and year-to-date sales results were below year ago, but our profits were about equal to year ago. We expect that these new initiatives will eventually improve the sales and profit results of our total skincare business in coming quarters, although we admit that this category is extremely competitive and we are a small player in it.

Next I'd like to say a few words about our oral care business. As you recall, this business segment consists of our ARM & HAMMER dental care brand and the four brands acquired in the 2003 acquisition of Unilever's domestic oral care business. The former Unilever brands, namely Mentadent, Close-Up, Aim and Pepsodent, word in long-term decline when we bought them. We have taken aggressive actions over the last two years to improve the product, packaging, advertising and merchandising of these brands.

We were successful in 2005 in reducing the rate of consumption of the sales decline experienced in 2004. Unfortunately our Q3 and year-to-date 2006 sales results were below year ago due to increased competitive activity by Crest and Colgate. We remain concerned about the increased competitive activity in this category, including the recent launch of the new Crest Pro-Health toothpaste.

To date through the first 10 weeks of the Pro-Health launch we've been able to maintain our marketshare on both of our premium brands -- ARM & HAMMER and Mentadent. This increased competition will continue to challenge our capabilities in this category; however, we believe that we can stabilize and eventually grow our oral care business in the long-term by implementing dependable new strategies.

One positive note in our oral care franchise is the resurgence of the Crest SpinBrush business which we purchased from Procter & Gamble in late 2005. Zvi will talk about this in a minute. Before Zvi does that I'd like to talk briefly about two other key business units.

First, our international business unit, which represents over 17% of our total sales, had an excellent third quarter with double-digit increases in sales driven by both organic growth and acquisitions. This performance was driven by our growth in our Canadian, UK and Australian subsidiaries partially offset by soft results in continental Europe.

Second, our specialty products division which represents over 10% of our total sales also had a strong quarter. In this business unit solid performance in our specialty chemicals business was partially offset by weak results in our animal nutrition business due to low milk prices. Now I'd like to switch gears and let Zvi provide you with an update on our two most recent acquisitions.

Thank you, Jim, and good morning. As you know, Church & Dwight has been very successful as a consolidator in the CPG industry for several years. In the past 12 months we have completed two major acquisitions, SpinBrush and Orange Glo. These two acquisitions perfectly fit our acquisition criteria. They are strong number one or two brands in their categories. They both draw scale in current core categories. We expect them to be accretive to earnings based on the price we paid for them and the synergies that we will achieve. And we expect them to deliver long-term profitable growth based on their market position and competitive advantages.

The SpinBrush business fit's all these criteria. It's a strong brand which competes for share leadership in the battery-powered toothbrush category; it will help to bolster our competitive position in the oral care category; and we purchased the business with sales of almost $100 million for less than $100 million. The secondary benefit, the product is sourced out of China which provides Church & Dwight with a foothold that we can potentially use to the source other Church & Dwight products or components.

Most importantly, we believe the battery-powered toothbrush category has significant long-term growth potential in view of the following facts. The total toothbrush market is nearly $2 billion, almost as large as the toothpaste market. Manual toothbrushes still dominate this market with over 80% of the units. However, battery-powered toothbrushes provide superior cleaning versus manual. And given increasing consumer awareness of the benefits of good oral care to person's overall health, we believe that battery-powered toothbrushes have significant growth opportunities.

Now let me comment on the integration process and brand performance. This was a difficult integration process due not only to the China factor, but also to specialized skills such as consumer electronics and marketing to kids of which we had to acquire very quickly. We had to move fast to repair the damage that was caused to the product through a product recall of two major SKUs in early 2005 before the acquisition.

As it is we acquired the brand in November 2005, completed the U.S. integration in March 2006 and international integration in June. For the last few months our focus has been on the innovation productline which is critical in this category. You can expect us to bolster this brand with some interesting innovations in 2007.

On the performance side I'm pleased to say that the SpinBrush brand has also gotten stronger. After falling behind in 2005 due to the recall the brand has now climbed back in 2006 and is now neck and neck with all of the marketing leadership of this battery operated toothbrush business over the last three months. In total we're very excited about the long-term growth potential for the SpinBrush business.

Now I would like to talk about our most recent acquisition, the Orange Glo Company. This business consists primarily of the well-known OxiClean brand and also has a cleaners business with the Kaboom and Orange Glo brands. Like SpinBrush, this acquisition fits our criteria; OxiClean is a leading brand in the growing laundry additive category; it will bolster our competitive position in the overall laundry business. And we acquired it for almost $200 million -- we acquired a $200 million business for a $325 million purchase price and with projected savings of over projected synergies of over $20 million this deal would provide meaningful accretion in future years.

And as a secondary benefit, it also provides us with expertise in direct response marketing which we plan to use to a more efficiently test and launch new products across our entire portfolio. Most importantly, we believe the laundry additive category has strong growth potential. The category is over $1 million in sales of a total laundry market of $8 billion. The cleaning power of laundry detergents has steadily declined over the past 15 years driven by consumer's switch from powder to liquid.

Powdered detergents actually provide much better cleaning power that liquid detergents but consumers prefer the convenience of liquids. As a result liquids have increased from 30 to 70% of the laundry market over the last 15 years. Laundry additives benefit from this consumer shift by offering products such as OxiClean that boost the stain cleaning power of liquid laundry detergents.

So smart consumers can buy a value liquid detergent like ARM & HAMMER and Xtra and add OxiClean to it to get the cleaning power of a premium detergent at a lower cost per washload. We believe this trend will continue which means continued growth at both our value laundry detergent business and the laundry additive business.

Now let me comment on the integration progress and brand performance. I would describe this as a fairly straightforward integration. Since acquiring the business in early August we've already merged the two sales organizations. The integration of the order to billing and financial systems begins in November and will be completed by year-end providing us most of the SG&A synergies in the first half of 2007. That leaves the supply chain.

Orange Glo -- the Orange Glo company used outside co-packers for all its manufacturing needs. We plan to bring most manufacturing in house which will reduce both the manufacturing and distribution costs as we ship the products out of our (indiscernible) warehouses. That process will take place in the first half 2007; it should be largely complete midyear, which means that we'll have the benefit of both the SG&A and supply chain synergies in the second half of 2007. Meantime, I'm please to say that the business has not missed a beat during the integration process.

With regard to the laundry additive business, both the category and the OxiClean brand are growing at low double digits and the Kaboom productline is also growing very nicely. Again, as with SpinBrush, we are optimistic about the OxiClean and Kaboom business for 2007. And now back to Jim.

Thanks, Zvi, for that update on our two recent acquisitions. Before we leave that subject I'd like to comment that the effort to pursue and integrate acquisitions has its pluses and minuses. On the plus side we have acquired some leading brands in the past two years that will strengthen our portfolio and will help to drive solid organic growth and earnings gains for years to come. In total the addition of these two businesses will increase our sales by over 15% or $300 million.

On the minus side, the effort of bidding and integrating acquisitions has had t a detrimental impact on the organic growth of some of our existing businesses. As the people who run these businesses have had to divert their attention to the acquisitions and away from running the poor businesses. Now while the net effect is positive to the Company, we plan on taking a break from acquisitions from now through at least the first half of 2007 due focus all of our resources on revitalizing the organic revenue growth of our core businesses, continue to drive improved gross margins and finishing the integration of the recently acquired businesses.

This temporary break from pursuing acquisitions will enable us to strengthen all parts of our portfolio including our smaller brands. We've always been able to grow our larger brands like ARM & HAMMER, Trojan and First Response, and we have proven to ourselves that when our resources are not distracted by acquisition opportunities we can generate improved sales and profits on even our smaller brands as we've been able to do this past year on our powdered laundry and household cleaners business. This focus on our organic growth will provide our company with a stronger base from which to consider adding acquisition opportunities in the future if the right opportunities come along.

Let me switch gears now and talk about the future. While we are pleased with the solid third-quarter and year-to-date results we are never satisfied. First, in terms of dealing with issues we've been able to absorb an unprecedented level of cost increases for raw materials, packaging and transportation and will still deliver double-digit earnings growth in 2006. We have a well-organized pipeline of cost saving initiatives in the areas of manufacturing, purchasing and distribution that are being executed and, along with the price increases taken in 2005 and 2006, have enabled us to more than offset the higher commodity costs in 2006.

Second, while the actions taken to offset the higher costs have temporarily impacted our organic growth, primarily due to the slower growth of our liquid laundry detergent business, we are confident that we can restore strong organic growth in 2007 for several reasons. First, the stronger than expected improvement in our gross margin will enable us to significantly increase investments in new product development and marketing spending going forward. Second, the increased marketing spending will be focused behind a stronger pipeline of meaningful new product innovations in every one of our core categories.

And third, organizational changes have been made in 2006 to drive improved organic growth and profits. These include the creation of a new product development team. This team has been in place since early 2006 and has already significantly bolstered the pipeline of new products that will be launched starting in 2007. In total I'm confident that the combination of increased marketing spending, a deeper and broader pipeline of new products and taking a temporary hiatus on pursuing further acquisitions will lead to stronger organic growth for the Company in 2007.

Now let me translate this into specific guidance for the rest of this year. In view of our solid results for the first three quarters and the significant improvement in gross margins, we're going to raise our earnings per share forecast for the year from $1.95 to a range of $1.98 to $2.00. When you add $0.09 for stock option expensing this represents a total EPS of $2.07 to $2.09 in comparison to last year's $1.83, an increase of 13 to 14%.

We are comfortable we can achieve this higher earnings per share target despite continuing volatility commodity prices, some onetime restructuring costs and, most importantly, spending significantly more on marketing and new product development in the fourth quarter to improve organic growth in 2007.

In summary, we are pleased with our third-quarter and year-to-date business results. Our primary objective again in 2006 was to restore our gross margins to at least year ago levels. Despite continuing high oil costs we have more than offset the gross margin impact. We will continue to drive cost savings to improve our gross margins, but now we can take a more balanced approach and devote equal focus on improving organic revenue growth in 2007 to our historic levels of 3 to 4%. We will also focus on integrating Orange Glo to reap the accretive benefits of this great acquisition starting in 2007.

So that ends our presentation. I'll now open the call to any questions that you may have which Matt, Zvi or I will do our best to answer. Thank you.

(OPERATOR INSTRUCTIONS). Bill Schmitz, Deutsche Bank.

Zvi, congratulations. I'm not sure what the call is going to be without hearing your voice on the line.

I'm sure (indiscernible). So you'll hear my voice anyway.

Can you just comment on ad spending a little bit? Because it seems like you were supposed to increase with this holistic ARM & HAMMER ad spending. And then if you look at the absolute organic number it looks like it was flat year-over-year. So are you taking funding away from some other initiatives and spending on other things or what's going on there?

Bill, this is Jim. It's a two-part answer to that. First of all, I think as you heard in my call, several of our new products didn't start advertising until August. So it really wasn't until about the middle of Q3 that we started advertising them. The results so far have been terrific and like the new Fridge Fresh product, cat litter product and other things. So we really started to poor on the gas in August and will continue to pour the gas on in the fourth quarter.

You'll see fourth-quarter media spending on the core business up about -- at least 25% versus year ago, again focused behind the new products going forward. So it really was more dealing with the timing of the new products. And I think I told you in earlier calls, we're being more and more focused on timing our advertising to the new product news because we're just finding that it just has much more benefit to the business than necessarily advertising the base business.

Great, thanks. And then can we just talk about compaction a little bit? Are you going to do full line compaction at some point, is this just a test? And then when did you decide to use the new [MES] plant-based product and is that going to be rolled out more broadly as well?

Yes, we will be doing a full line compaction. Bill, as we've said, we've started the rollout to leading retailers and we're very closely aligning our efforts with other industry efforts in that effort. So you'll see that occur over the course of 2007. The plant-based product, no, it was just a product we're seeing, as you well see in the paper every day, a growing group of consumers who want environmentally friendly products.

We were up approached by retailers asking us if we would do something in that regard and we put together a product that did that, again, called ARM & HAMMER Essentials. It fits with our long-term equity. The ARM & HAMMER brand has always been a brand known for its environmentally friendly products. We were one of the first three sponsors of earth day back in the '70s and so it was a perfect fit between our brand equity and what consumers want today.

Great, thanks. I think I know the answer to this, but just a question on the guidance. The $1.98 to $2.00, does that include the -- that's a GAAP number correct? So it includes the $0.03 tax gain this quarter?

This is Matt, Bill. The right way to think about the $1.88 to $2.00 is just a lot of factors -- $1.98 to $2.00. It's a bunch of factors. One is obviously the performance of the business in the fourth quarter. It's also going to be our first full quarter of Orange Glo and then obviously the tax credit would be baked in as well. There are a number of things that we would consider. Pricing is holding for us, so we feel good about that. But there are lots of pluses and minuses that would factor into the $1.98 to $2.00.

So that sort of backs into like a $0.29 number for the fourth quarter to get to the high end of the range? Is that right?

That's correct.

Okay, great. Thanks very much.

Alice Longley, Buckingham.

On that question, you said there's a restructuring charge in the fourth quarter, is that what -- $0.02 or something?

Yes, we made reference in the release that we have sold a plant and that we're going to have a minor charge. So at the most it would be $0.02.

Okay, and that's in the guidance, obviously?

Yes, that is baked in.

Gross margin, I understand this is down in the fourth quarter versus the third quarter. It is a very easy comparison for you year-over-year. How much has that declined from the third quarter or increased from a year ago, roughly?

I don't think we're going to have a line-item call with respect to gross margins. I think you have to appreciate the fact that we are going to have higher household concentration or as a percentage of sales in Q4, even versus Q3, because we're going to have a full quarter of Orange Glo.

The other thing to keep in mind is because you have less sales with respect to condoms, depilatories, antiperspirants in the personal care side with higher margins, that is going to impact us as well. So it should be below Q3 as expected, but you are right, it certainly will be higher than last year, and even last year adjusted for some charges that we had.

Well, I am assuming it is maybe 50 basis points lower than the third quarter. If that is way off, it would be nice to say something.

I don't think we are in a position right now to be that specific about Q4.

Okay. Would you give us some direction for gross margins in '07 versus '06?

No, I think it is too early. We will see you in February when we talk about our annual plans. We are still dotting the i's and crossing the t's on that. So we will give you more guidance at that point in time.

But you did say up; you are hoping to get gross margins up next year again.

The long-stated objective is to increase gross margins by at least 100 basis points a year, and you will hear that in our February call.

Okay. Then could you break out volume in this quarter or alternatively pricing for the U.S., and then for international separately?

I would say the simplest way to think about it, Alice, is if we said that organic growth was 2.5%, it was mostly price. I am pulling out acquisitions and FX just to keep it apples to apples.

I am assuming in the U.S. where your organic growth was under 1% that your volume was down; is that a good assumption?

Yes, it would be a net -- price up and volume down, and the net would be up approximately 1%.

Let me jump in for one second. I want to comment on this whole unit versus pricing. A lot of this goes back to the laundry business, and what you don't know is there was particularly one account out there which we had very aggressive promotions on in our Xtra brand. And when the price increases happened, that account wanted us to continue to supply them with product at very low prices and very minimal margins. We refused to do that and we lost the business in that account. That was the right thing to do to support the price increase.

As I said, it minimally had a minor negligible profit impact on us, but it had a large -- we lost quite a bit of volume in that account. The second thing also, remember a year ago at this point in time we launched Elexa. Elexa had a pipeline build of over $5 million. We laughed at this year -- we made it up -- our consumption growth was very strong on condoms, but we had a couple of issues going on. They were very specific things, which is why I sometimes react to the unit versus pricing theme because we had some issues going on which affected us on the unit side which were the right things to do and, therefore, made a difference between the unit versus total volume-driven numbers.

Got it. Okay, thank you.

Joe Altobello, CIBC World Markets.

First question is on commodity costs. When P&G announced their numbers, they raised guidance about $0.02 based on a better commodity cost outlook, and it sounds like you guys are still seeing some pressure. As we fast forward to '07, is there some optimism that you should see some lift from those commodity cost pressures, a lift on the gross margin front from an alleviation of those pressures?

Yes, if oil stays around $50 a barrel, there will certainly be some opportunity from that, but who knows in this world where things are. We are still being a little cautious on that, because every time we think it is going to stay low, something happens. But definitely if prices stay where they are, there would be some opportunity.

Are you seeing it translate right now, or it's still a couple quarters away?

Well, as you know, you see immediate benefit from the side of gasoline and diesel costs. It is much slower to come through other types of commodities like resins and things like that, because there is a pipeline out there of old higher priced stuff. So it is a kind of a mixed bag.

Okay. And then Secondly, on the Crest Pro-Health launch, you guys said that you were able to maintain share despite that. How much spending was involved or at least in terms of an order of magnitude how much spending did you guys have to have to move towards your oral care business to maintain that share?

Not significantly more, Joe. We pretty much shifted a lot from between the advertising and promotion line to defend our business, similar actions were done by almost every competitor out there. I would tell you though, the launch of Crest Pro-Health has been interesting to watch. It's driven minimal category growth of 1 to 2%. It's driven a lob of competition to perk up in the category. So it's been largely just a share battle between Crest and Colgate so far.

Okay. And lastly if I could. Consumer International, that was much higher than I was looking for. And obviously that's not all coming from the Brazilian skincare acquisition. What was driving the significant increase in sales there?

We actually had broad based strength in the third quarter. The UK, Canada, Australia all had very strong results. It was a good quarter for Nair in virtually all of our markets. And ARM & HAMMER Enamel Care toothpaste in the UK is being accepted very well. So it's not simply the acquisitions driving that. We had some significant organic growth there as well.

Okay, thanks.

Wendy Nicholson, Citigroup.

I just have kind of a longer-term question with regard to your marketing spending. Clearly not just in oral care but in a couple of other categories, life's getting tougher and the world is getting smaller and more competitive and I was just wondering your marketing spending used to be in sort of the 8% range and last couple of years it's in the 11% range. Where do you think that goes over the next couple of years? Do you think it takes another leg up to the 12 to 13% range like you're seeing in the fourth quarter permanently? Is the cost of competing just getting higher or how do you think about that?

Wendy, you're going to see us in the range somewhere 11 to 13% in most quarters. It depends on our new product activity we have going on, it depends on competition. But I'd also remind you we only advertise about 70% of our portfolio, the other 30% is more value-based brand which is much more pricing directed. So you really almost have to divide that 11 to 13% by 0.7 to see our percent of spending for the advertised brands. So we feel that's a very competitive range.

Again, you'll see us -- I think we're getting better and better at how we time that and use that money and put it behind product news. But your bottom-line answer will be you'll see us in the 11 to 13% range. And certainly as we have the capability to get it up toward the upper end of that range through cost savings we're going to do that and especially if we have a lot of good product news coming which I'm very optimistic about for 2007.

And does that come as an offset to lower promotions? I mean aside from what we saw just this year in the detergent category which sounds like it was very much related to the pricing actions you took, do you also sort of anticipate an offset from just lower -- kind of a reduction in the gross to net level, lower promotion levels helping to fund some of that incremental marketing spending on the SG&A line? Or does that have to be funded from cost synergies and savings and restructuring of the core business?

A little bit of both, Wendy. We have had a several year project now to put a Siebel system in that does a much better job of analyzing our trade promotions out there and we're using that to try to cut down on promotions that are unprofitable and obviously put that money in our pockets. And then when we do that we do like to whenever we can use that money to pump up the advertising side. But not always.

We generally are also doing a lot of other cost savings initiatives through supply chain efforts and restructuring efforts to lower our cost of goods and raise our gross margins and we do like to spend back some of that cost savings on the advertising line. So we do want to over time continue to inch up the advertising side behind our brands, especially as we're -- again, our new product pipeline is getting much stronger than it was in the past and therefore it's worth it to spend more money behind the new product news that's coming.

Terrific, thanks very much.

Connie Maneaty, Prudential.

It's Matt Palazzolo for Connie. Zvi talked about the sourcing for SpinBrush out of China and how it's kind of a foothold for other products potentially going forward. Can you talk about what products are available in that arena and then also the timing on that?

At the same time as we acquired the sourcing capability we also acquired a distribution capability in China and we're obviously looking at what we might be able to do there over the long-term. I'd really not rather -- obviously we have toothbrushes right now -- the SpinBrush distributor right now. I'd really rather not get any further as to what else we might be thinking about there. That's something that we might be willing to talk about sometime in 2007 but not just right now.

Okay. And then I guess secondarily, can you give us your most updated thoughts on Elexa and kind of what learnings you got from that launch as you enter 2007 with all the launches that seem to be coming in that year?

Elexa has been an interesting case. As you know, we went after that because we found that women were really disenfranchised from the condom business despite the fact they bought about one out of three condoms, but most categories women buy over half the sales in a category. So we launched Elexa, as we said, last Q3 -- major initiative, great deal of spending behind it. The good news is it has driven about 2 share points of the almost 3 share point gain that's occurred in the Trojan business since we launched, so that's been terrific.

We are seeing some trends among the women that are much more positive for the category which is good. But if you've heard me before, this is a business again that only one out of four times when two people are having sex when there is a risk of transmitting a disease they can only one out of four times they use a condom. So I'm never going to be happy until I see this category grow dramatically.

Since Elexa's launch the category growth rate has gone from low single digits to mid single digits, but I'm a hard man to please and I'm looking for double-digit category growth rates here and we haven't got there yet. So we're continuing to work hard against this, we've got new products coming out for both Elexa and the base Trojan line next year, constantly working on new marketing programs to crack that because it's just a huge opportunity and Elexa was a good dent in the wall but we need a lot more behind it going forward.

Thanks.

Jason Gere, A.G. Edward.

Good morning. Just a couple of questions. One, you did talk about cost inflation and obviously you talked a little a little bit about the inefficient trade spending. Can you talk about just some of the ongoing cost saving initiatives you have in place and I guess your outlook going forward excluding what you would get from acquisitions such as SpinBrush?

There are a couple of things. Obviously a big part of our cost structure is in our cost of goods sold. So we have a continuous improvement program with respect to the sourcing of our (indiscernible) and packaging materials. That's number one. Number two would be with respect to how we run our plants. We use a lot of the contemporary programs that you hear from other large manufacturing companies to try to improve our yield, our quality, etc. So this is a company that is trying to continually lower its cost per unit and introduce as many contemporary initiatives as possible into our plants. I'd say with respect to SG&A, we're very vigilant about SG&A costs historically and we'll continue that in the future.

Okay. And just on the SG&A, I mean obviously with the acquisitions in there I think you were saying more like the back half of next year once some of the synergies start to come through that's when we should start to see the SG&A leverage really starting to come through more clearly?

The SG&A leverage will come gradually. Obviously it can be lumpy as well to the extent that people are removed from the acquired businesses.

Okay. And then I guess shifting a little bit to the deodorant business. It sounds like right now you're managing it more for profitability than obviously for volume and obviously that's not a planned thing with intense competition. Can you talk about in light of with Wal-Mart, with softer same-store sales and also with their project remix -- can you talk a little bit about that category, how you're fairing the facings that you have there, the discussions maybe with someone like Wal-Mart at this point?

That's a good question. Underarm deodorant is a pretty fascinating category. There are about 23 known brand names in it. Our biggest brand, Arrid, which is the bulk of our business is about number nine in the category. So, on the upside, while there are eight guys above us there are 14 guys less than us in the category. So there are a lot of other guys that face more pressure than we do in terms of shelf space.

I would just say to you that we work very hard with the accounts on making sure we're doing the right things to promote our business. We are keeping the business very current with trends whether it be fragrances and packaging and that, but it's a constant battle because 23 brands quite honestly is too many brands for any category. The accounts like Wal-Mart and Target and everybody out there are very smart about trying to manage their categories these days, so they always are constantly reviewing the number of brands and the SKU mix and everything else.

So it's just a constant dialogue with them. We've got a great sales force that does that and we're just doing our best to keep our brands as strong as possible in that situation.

Other than I guess the deodorants and maybe the value toothpaste brands, are there any other brands that you have that you worry a little bit about with Wal-Mart seeming to be a little bit angrier these days and obviously needing to make some changes in their store?

No, those are the two key categories that are the most concern to us. On the value toothpaste side, keep in mind, we still feel there's a very viable niche there of toothpastes that sell under $1.00. We have a like a 70 share of that category and there are still a lot of users out there who can't afford to pay for that. So again, we work very closely with the accounts. The accounts recognize that and we just make sure we keep our brands refreshed with new flavors and packaging to keep them current with consumers.

I just have one housekeeping question. I guess I might have missed this. On the tax rate, did you say I guess because of the R&D issue that still to use a 37% rate going forward for now?

Yes. 36.5 is what I would suggest for Q4 absent the R&D tax credit.

Okay. So what happened in this quarter if you strip out the tax benefit that came through? It came in at like 35%. Can you just clarify that a little bit?

say again.

I think the tax rate -- I think in the release, if you exclude the tax benefit that you got, it came in about 35. So then I was just kind of curious why the disconnect between 35 and then back to the 37?

The way you account for the taxes is you have an estimate of what you think -- (multiple speakers)

So this is a catch-up then?

-- what your full year rate is going to be. Then you true-up as you go. So it just turns out that 36.5%, which is our year-to-date number for the first three quarters, is also the number we're going to use for the fourth quarter.

Okay, thanks.

Alice Longley, Buckingham.

I was wondering if you would update on your trend line EPS growth guidance the way you reminded us that grows margins are supposed to improve more than 100 basis points a year, what earnings growth rate are you committing to on a trend line basis. And then should we assume that accretion from acquisitions are in addition to that?

Alice, this is Jim again. Again, it's a little early for that; we're still finalizing our 2007 plan. We have historically told you to expect earnings per share growth of around a total of 10 to 12%, but obviously we're still looking at that, we'll be looking at the final impacts of Orange Glo next year in that. So I would just ask you to hold on a little bit until we see you in February and give you the whole complete story with all the components to it, but it would be at least consistent with that.

Okay. But in the past you've assumed accretion from acquisitions within that number, but you're reconsidering that?

Yes, we're putting it all together and we'll have a very thorough and complete answer come February.

Okay, thank you.

I've got to wrap it up here right now. I'd like to first, since this is Zvi's final call with the Company and he's been such an important part of our past, I'd like to give him a second to comment about the Company before he leaves.

Thank you, Jim. I just want to say that I joined the Company in 1979, I've been CFO here for 20 of the last 27 years. And so I'd just like to make some comments about the Company. For the record, Church & Dwight has delivered a growth rate -- sales and earnings growth rate of 12 to 13% compounded for the last 27 years. And a stock appreciation of around 15 to -- actually 16% compounded for the same period.

To me that means that a well-managed MidCap company with strong brand equities can do very well in this industry. In fact, I think a well-managed and strong MidCap company can actually deliver better organic growth than the bigger players and also has the benefit time to time of being able to top up that growth rate with acquisitions. So I think the future for Church & Dwight is extremely bright. And I do have -- as I leave I do have confidence in the management team and in particular Jim and Matt, I think they'll do a fine job. And now back to Jim.

Thanks, Zvi. Folks, thank you for taking the time today to listen to us and ask some very good questions. We look forward to seeing you in February when we'll announce our Q4 results and we'll give you a full revelation of our 2007 plan. I'll just tell you, I'm very excited about 2007. As I said to you earlier, we're going to have a renewed focus on organic growth here. We've got some exciting new products and marketing initiatives to support that.

We're going to have a continued strong focus on cost savings which has really delivered and stays in 2006. And also we're going to focus, at least in the first half of the year, of trying to swallow or integrate the acquisitions that have been made in the past two years, particularly the Orange Glo acquisition which has been a beautiful addition to our company. So we'll give you the complete picture then and look forward to talking to you. Thank you.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.